The Hospital for Healthy Living (HHL) financial statements are in the Excel file named CH18_Financials_Templates at this books companion website. During fiscal year 2019, HHL decides to outsource its information technology services to another company. By outsourcing, HHL will be able to get rid of certain services and staff that cost the hospital $175,000 annually. There is an upfront cost to undertaking this venture, because the company must set up servers, backup systems, and e-mail accounts for HHL. Then, there are annual contract payments that HHL must make with the IT company. The board of directors has agreed to a 4-year contract. Management is entertaining bids from two companies. The first requires a $250,000 payment for the initial conversion and $100,000 per year thereafter. The other bid requires a $350,000 payment up front but only $75,000 annually. HHL has a 6% cost of capital. Which option should HHL choose?

Option 1 \begin{tabular}{|l|r|r|r|r|r|} \hline & Investment & Year 1 & Year 2 & Year 3 & Year 4 \\ \hline Initial Contract & 250,000 & & & & \\ \hline Annual Contract Cost & & & & & \\ \hline & & 100,000 & 100,000 & 100,000 & 100,000 \\ \hline Estimated Savings & & & & & \\ \hline & & 175,000 & 175,000 & 175,000 & 175,000 \\ \hline Net Cash Flow & 250,000 & 75,000 & 75,000 & 75,000 & 75,000 \\ \hline \end{tabular} NPV: Option 2 Purchase Price 350000 \begin{tabular}{|l|r|r|r|r|r|} \hline Annual Contract Cost & & (75,000) & (75,000) & (75,000) & (75,000) \\ \hline & & & & & \\ \hline Estimated Savings & & 175,000 & 175,000 & 175,000 & 175,000 \\ \hline & & & & & \\ \hline Net Cash Flow & 350000 & 100000 & 100000 & 100000 & 100000 \\ \hline \end{tabular} NPV